The Investment Column: BP beats its targets again

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The Independent Online
The top brass at British Petroleum can be forgiven for appearing a little smug, having comfortably matched or exceeded their financial targets yet again. True, the board dampened speculation of an imminent share buy-back, but the 18 per cent hike in the dividend payout in the second quarter to 5p a share was an acceptable alternative.

Analysts have now raised full-year dividend forecasts to around 19.5p, which would represent a rise of almost 30 per cent. BP is now committed to paying out half of its earnings in dividends over the medium term cycle, adjusted for the volatility of oil prices. Not bad from a company which was staring over the precipice just four years ago.

One of the reasons for such a bright outlook is the consistency of earnings across the group. Half year profits after exceptionals were up 21 per cent at pounds 1,216bn. The quarterly profit between April and June before exceptionals rose 25 per cent, which compared well with Shell's results last week, where net income fell by 8 per cent in the second quarter.

The comparison isn't entirely fair. BP is smaller than Shell, though with capital expenditure expected to rise to $6bn by next year it is catching up, and because of its greater exposure to the up-stream oil sector it gets more benefit from the recent increase in oil prices. But it is undoubtedly reaping the benefits of an earlier and much more brutal rationalisation.

One of the big differences between BP and most other oil companies is in the refining and marketing areas, where second-quarter earnings rose no less than 57 per cent (for Shell, read 5 per cent).

Despite intense competition, particularly in the UK petrol businesses, BP is a leaner operation these days with fewer unpleasant suprises than some of its rivals. The return on capital is also among the best, at between 17 and 18 per cent, against 10 per cent at Shell.

Even after yesterday's 7p rise in the share price to 603p, up from 455p in the space of a year, the shares remain attractive. At this price, given the prospect for further hefty dividend increases and, perhaps, a share buy-back next year, they still look good value.